San Francisco Business Times, July 28, 2003
Bay Area tech firms cashing in on sourcing out
|Moving tech work offshore is good business for some companies back home.
Technology outsourcing firms, which take over clients' IT projects and get them done more cheaply in places like India and China, are starting to cash in big. And with no signs of the offshore rush ending soon, more players are piling into the game.
San Francisco-based Exigen Group is tracking to do roughly $60 million in revenue for 2003, up from $40 million in 2002 and some $10 million in 2001. San Mateo-based Digital Fuel is slated to do roughly $10 million in 2003. And Symphony Services, a Palo Alto-based outsourcing firm headed by i2 Technologies' former COO, is launching this week and hopes to follow suit.
Service and consulting revenue, of which outsourcing deals are a part, is also up at bigger players like Hewlett-Packard, IBM and EDS.
Companies (which range from struggling Siebel Systems and E.piphany to healthy and profitable Wells Fargo Co. and ChevronTexaco Corp.) are finding that it pays to let someone else do the work.
Programmer and developer salaries in India and China are roughly one-half to one-third the salaries paid in the United States. Analytics, call center operations and business processes (like automating human resources, financial transactions and mortgages) are important to big businesses, but aren't, and don't need to be, core areas of expertise they devote staff to.
According to Gartner, the outsourcing market is just beginning to blossom, with the $6.6 billion market in 2002 slated to jump to $15 billion in 2007. Forrester Research estimates that 3.3 million U.S. service jobs -- including 1 million in IT -- will move abroad in the next 15 years.
"There's an opportunity to normalize a very large set of processes," said Exigen CEO Greg Shenkman, adding that his 600-person firm is targeting financial institutions, telecommunication companies and the government. The 4-year-old company maintains its global headquarters in San Francisco, but employs a cadre of programmers in Eastern Europe and India who custom-build applications for 300 customers, including Prudential Securities, Allstate Corp., Bell Canada and the University of Moscow.
Exigen and Micro Focus International Ltd. recently invested more than $1 million to boost tech education in Eastern Europe and bolster programmer skills in COBOL, Java and application maintenance.
Shenkman said the outsourcing business has changed substantially over the past year, with customers demanding decreased cost and increased features and customer satisfaction.
He said: "A year ago very few people would ask, 'What's the correlation between the features and capabilities of a technology and the economic returns it will deliver and the risks it will bear for other parts of the organization?' "
Exigen Group (which raised a whopping $62 million in September 2002 from Lightspeed Venture Partners, Focus Ventures and Investor Growth Capital) plans to stabilize the business this year and reach profitability, Shenkman said.
Symphony tunes up
Symphony Services, which scored BroadVision and Manugistics as customers, is also focused on reaching the black, but will focus exclusively on software company clients. The company emerges from stealth mode this week.
"Growth solves all problems in the software industry. Software companies have already taken all the easy costs out -- they did that in 2001," said Symphony Services CEO and Symphony Technology Group partner Bob Evans. "Now it's time to transform the cost structure, not just cut it by 5 percent."
Symphony is backed exclusively by Symphony Technology Group -- a $300 million VC group of five former software execs that have invested in a handful of software firms. Several of the partners (who now serve double duty at Symphony Services, the outsourcing company) worked previously at Aspect Development Inc., where roughly 700 of their 1,100-person work force was based in India.
Said Evans: "I learned that in outsourcing you live or die in terms of innovation and creativity. It's really easy to fall back on the lower labor cost, but if you do that then you become a commodity."
Symphony Services employs 10 at its Palo Alto headquarters, 65 total across the United States and contracts with 400 full-time employees in Bangalore, India. Evans says he expects the company to be cash-flow positive by the end of the year.
Digital Fuel Vice President of Marketing Kevin Faulkner noted that his company, which provides software that tracks outsourced projects, is increasingly selling to outsource firms and their customers. The 3-year-old company employs 50 and broke even for two consecutive quarters before taking $8 million in funding earlier this month.
Said Faulkner: "It's a good market. We don't have to wait around for telcos to come back like some people do."
Lizette Wilson covers technology for the San Francisco Business Times.